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Real Estate and Mortgage Issues July 8, 2008

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Just wanted to post on the most recent RE and Mortgage Issues.  First as I have been saying for a long time now foreclosure rates are being pushed by the sub-prime loans. Even though sub-prime and FHA loans account for only 20% of loans, they account for 60% of foreclosures.  And even in this class the foreclosures are driven by two states, Florida and California which have 21% of loans outstanding and 36% of the loans in foreclosure.  These two states had the most speculative action and the largest run-up  in prices, so now we see them leading the way back down.  Now here is the important part.  This was a predictable event.  When you see pricing marching upward 20-30%, then you know there is a bubble and the equity returns will descend to the mean.  When you loan money to folks who have no reserves and poor credit scores, there will be a large group of them fail to make payments.  Its not rocket science folks!  Indy Mac, a large lender in the option arm market has now stopped lending and will probably fail.  Regular readers know my opinion of option arms by now.  If you entice folks by telling them they have a 1% mortgage rate and/or they don’t have to pay back even the interest on the loan, then you are going to get folks that take you up on that and end up in foreclosure.

As far as values, outside of a few speculative areas and a few areas where jobs have vanished, values remain pretty decent.  Here is a video on Manhattan real estate for those interested in high end markets: http://www.dottieherman.com/video_mmo2_long.htm

Bottom line, is that lending has gone back to what was standard before 2002 and rates remain historically low.  You are going to need some capital (as well as you should) to buy a home except for FHA loans.  Don’t try to time the market, make decisions based on a well thought out plan.  Remember the calculus for personal residence and investment properties are completly different.  For your home, save some money up for at least a 10% down payment, get credit scores above 700, and take your time (there is much inventory).  Remember people who don’t own their own home rarely have positive net worths at the end of the day.  Investment property figure cap rates, cash flow, local rental histories, and area job growth.  Do your homework and don’t overpay just because the area is hot!

Media Creates Another Untrue Story! May 10, 2008

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I have already posted several times that the story that variable rate mortgages resetting causing folks to foreclose is not really much of a story after all with this causing less than 2% of the foreclosures.  Now we have the “walk away” stories.  Seems that the media wants us to think that all these folks are walking away from their homes because they owe more than the homes are worth.  Well, Fannie Mae and Freddie Mac, the two major folks who bought and currently buy mortgages say that is not true, at least with their customers who represent the majority of borrowers.  Freddie Mac estimates that the walk-a-way’s represent .14% of defaulted loans.  So again the media was making much of really nothing.  And once again, you have to look at the investors for any significant amount of voluntary foreclosures.  Folks, I have said it before and will say it repeatedly, this foreclosure crisis is caused by lenders giving money to folks with poor track records of handling debt.  It is that simple.  As to the rest of folks the foreclosures are the result of the same things as always.  Job losses, sickness, death of bread winner, and divorce.  Recessions cause foreclosures to go up.  Personal tragedies cause foreclosures. 

Now with the folks who never should have gotten a home loan, because they had no reserves, no money for a down payment, and had a poor history of paying back debt.  Did they get sucked into bad deals?  Well maybe, certainly, the lenders did them no good sucking fees in, while the going was good, selling this stuff to greedy Wall Street folks, waiting for the inevitable foreclosure.  But there was much greed going around, from the real estate folks selling these houses to folks they knew or should have known had no business buying a home, to the folks themselves who “only wanted to buy into the American Dream,” but were not willing to wait until they had developed the financial habits to suceed in home ownership.

Now the congress wants to legislate so this won’t happen again.  OK, but want to bet somewhere down the line it will?  Meanwhile, we wait and watch as this unwinds and the real estate market returns to normalcy.     

How to buy a home? April 30, 2008

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Since many people have asked, I decided to answer the questions of what the consumer can do to assure themselves a fair real estate transaction.

1.  Check your credit report now.  Fix problems and incorrect information as you find them.  This is a time consuming issue, so better to find out now and start fixing it if needed.  Check you credit report every 6 months thereafter to make sure it stays correct.  FICO scores are more important than ever before!

2.  Find a mortgage broker that will disclose all fee’s and points including yield spread  premium (YSP).  Banks don’t have to disclose these back-end expenses by law and most won’t even if you ask them.  Negotiate the total amount of fee’s and points the mortgage broker will make on your loan up front.  Then demand that the YSP be disclosed when the loan is locked (not 72 hrs. before closing as the law requires).  This keeps the loan officer honest and allows for him/her to actually work for you in finding the best program and rate for your individual situation since the loan officer knows how much they are making up front and is satisfied with it.  I suggest you find a local loan officer instead of one from a 1-800 number or the internet and have a personal sit down with her/him.  You will know if this person is professional and competent by the end of the interview.  Listen to your intuition, ask questions about their education and experience, and don’t be afraid to say I don’t feel comfortable doing business with you right now!  If they are suggesting that you purchase a home with a payment that scares you, find another mortgage originator.  They should have a full appreciation for your financial situation and give you advice on what is too much as well as what program would work the best for you.  Be prepared to accept bad news on how much house you can afford as well as when you will be best prepared financially to purchase a home.

3.  Find a real estate agent that is experienced and works full-time as an agent.  Hire them as a buyer’s agent.  Tell them exactly what you are looking for and when you are plan on buying.  Use the internet to search for properties and get a feel for the market.  When you see a home you like send it to your real estate agent.  This will allow them to better understand what you are looking for.  Don’t physically look at every house, it only gets confusing after a while.  Use the internet and your agent to cull the homes until you have a top 5.  Then talk to your agent about each home’s location, the good the bad and the ugly,  how each neighborhood is fairing in the current market, schools, etc.  Then go look at your top five.  I mean really look at the home, spend hours looking at every conceivable part of the property, ask questions as they pop into you head.  This is where a great agent should shine.  They should be able to honestly discuss all the details of the home with you.  If you feel you are not getting the honest answers fire your agent!

4. Never use the agent’s in-house mortgage guy.  Usually there is a business relationship between the lender and the real estate broker which allows the broker to share the profits of the loan.  This means the loan officer will have to add in unecessary fee’s/points to make up for having to share the proceeds.  Never use the associated title company for the same reason.  Ask if there are any business relationships between the real estate broker and all the other parties.  Part of the failure of the last few years is that there were too close of connections between all the parties in the real estate deal.  Talk to the appraiser before they appraise your home.  Tell them they work for you and you want to know what the real appraised value is, not what the loan officer, real estate agent, or seller thinks it is.  Hold the appraiser accountable for her/his work!  They are there to protect the lender and YOU from paying over market value.

5. Read all the paperwork.  I know for the most part it will read like gobbligook to you, but you would be surprised what you learn from reading it.

6.  Don’t be fee driven.  Many people shoot themselves in the foot by trying to use folks who charge less fee’s.  You get what you pay for.  You want to work with experienced professionals who will expect to be fairly compensated.  These folks are your best defense against making a bad decision, treat them fairly and they will help you immensely.

7. Choose several homes you would be happy to purchase.  Start with the one you like the best and negotiate hard with the seller.  Be willing to walk away if the seller won’t negotiate.  Move on to the next one on your list and start negotiating hard.  Repeat if necessary. 

Remembrance of three mortgage deals. April 3, 2008

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I take this time, as legislatures attempt to grapple with the credit issues of the day to remember three mortgage deals that presented to me.  It is my way of pointing out the folly of trying to find victims in this situation.

She came to me through a mom’s group that my wife belongs to.  She was living in a relatives home for almost a year.  Her husband worked, while she was a stay home mom to two children.  She wanted to buy a home because her relative “was being unreasonable” with them.  Quickly, we found out that they owed money to several entities leaving them with a credit score in the mid 500’s.  They had only a few thousand dollars saved over the year they had been living rent free.  The husband made little money.  And she didn’t want to work, even part-time, because she wanted to take care of the children.  I proposed a plan that had them paying off their debts, saving money for a down payment and having her work part-time. I even gave her two names of folks willing to hire part-time moms.  I told her the plan would take about a year to pull off.  “That is unacceptable,” she tells me.  “What about those stated loans?”  I tell her I will not lie for her, and beside, they couldn’t save money now, so how were they going to find the money to pay a mortgage?  She then bad mouths me to several people who tell my wife about it.  She finds someone else to do the deal for her, and the house was in foreclosure several months after.

A gentleman comes to me who had declared bankruptcy a few months before.  He had gotten himself into a mortgage with a “equity based loan,” which had a variable interest rate going up to 13%.  He made good money, just lost control of spending that caused the bankruptcy.  He was a commission salesperson.  I found him a sub-prime loan, insisted on him taking the fixed rate, and financed it with home equity.  For income documentation they took 12 months worth of checking account inputs and outputs.  Because his scores had come up to the mid 600’s I was able to get him an interest rate of 7%.  He has not been a day late in the several years since.

He ran a successful business.  However, he expensed out quite a bit so couldn’t demonstrate a realistic income.  He had plenty of cash flow.  Credit scores in the high 700’s.  We got him a stated income loan with a interest rate of 6.675%.  He also owns three investment homes.  He has never missed a payment and his credit scores have gone up since we did the loan.

As I watch the government shenanigans, and finger pointing, I wonder who are the real victims here.  I wonder about the couple of handful of folks who approached me for a sub-prime loan, but went elsewhere when I insisted on them having a fixed rate.  I wonder about those folks who bought option arms from someone else, after I suggested a different loan program was best for them.  I wonder about those folks who scoffed at my suggestion to pull out equity then, who are losing their homes now.  I wonder about those folks who I suggested use a professional real estate person to sell their home because the market was going bad, but did the For Sale By Owner thing and never sold their homes.

Who are the victims?  I wonder….. 

How the wealthy handle their Real Estate? March 18, 2008

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I recently read an interesting article in the NY Times about the wealthy and their real estate financing.


When the NY Times writes about finance ideas you know that the wealthy have used these ideas for years.  Typically, the NY Times doesn’t define “wealthy,” but they do make a very important point.  Those that are buying their first home, that have little in the way of reserves, that have low credit scores, should get a 30 or 40 year fixed rate mortgage and learn how to make those payments and build up some equity before they can move on to more advanced financial techniques.  You have to learn how to walk before you run!

Now, for the rest of us I will quickly go over the more advanced techniques that I have been getting my clients into for years.

1. Interest Only Loans.  This loan, although slightly more expensive than the fully amortizing loans create maximum cash flow.  You can get them with a variable rate or a fixed rate.  Basically, your required payment is the interest due on the loan each month.  So you gain the tax benefits of mortgage interest, but are not required to make a principle payment for years (10,15).  This allows you to keep more money for yourself, to invest in, college funding, etc.  And if paying off your mortgage is your goal, you can make a principal payment anytime and lower your required payment.  This works especially well for those who have variable income, or who get bonuses or those that invest and make money from their investments periodically.  It puts you in charge instead of the lender.

2. Variable Rate Loans.  The bain of the sub-prime set, offers advantages for the financially responsible.  These range from monthly re-sets (Home Equity Lines are usually set up this way) to fixed for 3-5-7-10 or 12 years before they reset.  Very few people are in the same loan for more than 10 years.  They either move to another home, or refinance.  So why pay the extra expense for a 30 year fixed rate loan?  Now, sometimes the variable rate loans have a much lower interest rate, while other times the spread is minimal.  Bottom line, you should check the difference and make your decision based on what your past habits and future plans are.  

3. Equity Management.  I have blogged on this extensively in the past.  Just click on the link to the right for details.  Bottom line, people who could afford to have a paid off home, choose not to because they can put that money to work for them, instead of leaving it inside the walls of their home.  It is a time tested strategy and recently has been the topic of several financial best selling books.

Don’t think that these strategies are only for the rich, the reality is exactly the opposite.  The rich put these strategies in play to get wealthy!!!

Whew, I’m dizzy! March 15, 2008

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Last week mortgage rates were all over the place.  In fact, on Wednesday, one lender re-priced five times in one day!

What this means is that the mortgage bond market is unsure of the future.  Are we going into a deep recession?  Do we have to worry about inflation?  How are stocks going to do?  All these questions without definitive answers leave the market in a deep funk and a resulting unstable mortgage rate environment.

Not only are the bond markets unstable, so are the stock markets.  Ironically, these are times that make experts.  Yep, there are only three possibilities, good times for the market, bad times for the market, a flat market.  As an expert you have a 33% chance of being right.  These are pretty good odds, so they will stake a territory.  And what is even better for the experts, if they are wrong, no one will call them on it.  Sure no one will talk to them for a little while, instead interviewing the one’s that guessed correctly.  But, even if their wrong guess cost people big $$, no one will talk about it and a few months later they will start appearing as an expert again.  It’s really a great gig if you can get it!

In this environment individual investors make their decisions.  No wonder so many of them let fear rule the day.  I’m sure we are seeing outflow from mutual funds and people sell funds that apparently are not doing well.  If you are considering this, think again.  Never sell from fear.  Sell when you want to change your strategy from mutual funds to something else.

If you are trying to time the market, don’t.  If you are trying to time the mortgage market, don’t.  If it makes sense to refinance or buy real estate do.  Let the numbers decide, not your emotions.  

Foreclosure, Home Equity Declines and You! March 10, 2008

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There has been much attention to the rising rates of foreclosure of late.  Additionally, the federal reserve issued a press release last week about the decreasing amount of home equity held by Americans.  So I thought I would blog on this with an eye toward you folks out there that are financially responsible.

First of all the overall foreclosure rate has broken the 2% mark.  But let’s look behind these numbers.  The rate of foreclosure for prime loans (loans made to people with reasonably good credit) is still below 1%.  So for folks that had a good history of paying their bills, the foreclosure rate is within historical range (although on the high end).  Sub-prime loans are another story.  For sub-prime fixed rate loans the foreclosure rate is 1.52%, while the variable rate loans rate is 5.29%.  Both are historically high rates.  I have mentioned this many times before, but this is not surprising for two reasons.  First, when you are giving loans to people who have not paid their bills in the immediate past, it is not surprising that they continue that behavior.  What is surprising is that so many of these folks have been able to pay their mortgage, given their history.  Secondly, the industry has used teaser rates and sold the lower interest rate of variable loans to gain a competitive edge over other loan officers and companies that take a responsible approach to lending.  Here is a statistic that should really illuminate the foreclosure crisis.  Currently 42% of the foreclosure starts are folks with a sub-prime variable rate loans.  These loans only make up 7% of the total loans out there.  One more point about the  sub-prime variable rate loans is that the majority of folks went into foreclosure BEFORE their interest rate rose!  And the 6 month LIBOR rate, which most of the  sub-prime adjustments are based on has come down 2.5% lately.

Next is the fact that 18% of the foreclosures are on non-owner occupied properties.  Many of these loans had high loan to value percentages.  So for some, this might be a business decision to get out of a bad investment decision.  If you are upside down on your loan (owing more than the worth of the property), you are cash negative, and you never had great credit scores to begin with why not walk away?  There is even a California company that for $995 will teach you how to do this with as little damage as possible to your personal finances!  Consider this just like companies declaring bankruptcy, a chance to reorganize.

Finally, the foreclosure action is not spread evenly.  California and Florida have the most, followed by Arizona, Nevada and the Midwest.  California, Florida, Arizona and Nevada had the most price appreciation since 2000, so are seeing home values drop the most (still way ahead of 2000 numbers).  Where there was double digit price appreciation there were speculators.  Most of these speculators were amateur investors although the large development companies acted in the same way.  Those states are now paying the price for all this speculative activity just as the tech stocks have been paying the price for the speculative action of the late 1990’s.

Is it surprising that when real estate values go down that home equity percentages also go down?  No.  When the federal reserve last week sent out the information on this the mass media made a big deal of it and tried to tie it to the foreclosure activity.  However, the truth is that home equity has been declining (percentage basis) since 1945 as the Federal Reserve pointed out in their press release, but most media outlets conveniently dropped that line.

As regular readers know, I am not a big fan of keeping home equity inside of homes, so it should not surprise you that I give a big yawn to all this noise about declining home equity and foreclosure activity.  To it I say so what?  Yes, it will dampen real estate values for a time, especially in California, Florida, Arizona, and Nevada.  Yes, the recession will exasperate the foreclosure rate and will probably extend the real estate down cycle.  Yes, if you have to sell your home in the face of this, it will be difficult.  But real estate has always been cyclical and one should know this going in.

So what  does this all mean to you?  Well, as long as  you have a decent amount in an emergency fund to cover …well …. emergencies like job loss, sickness, etc. you should be fine.  Just sit tight and let the down real estate cycle finish.  But, if you live in an area that is suffering job losses and out migration then, you might take a look your real estate investment.  It took Houston Texas twenty years to recover from the oil based recession that started in the late 1970’s.  Like all investments, your real estate should be examined based on fundamentals like population inflow/outflow, jobs, demographics, and neighborhood stability.  Frankly, real estate is a great investment most of the time, but what the realtors and lenders won’t tell you is that there are certain circumstances and geographic areas that it would be best to rent rather than own!

Hope this makes sense and is helpful.

The 1.5 point Challenge! March 3, 2008

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I have given much thought to how to allay folk’s fear when getting a mortgage that they are getting the best rate they can.  Frankly, I have blogged why chasing rate from one lender to another never works.  So I have instituted the 1.5 point challenge.

Folks who get a loan through me will pay a total of 1.5  points for their loan.  This can be up front points (the cheapest way) or on the back end as yield spread premium or any combination. 

Now to put this in perspective, banks usually make 2-2.25 points when they price a loan.   Most brokers will try to get 2 points if they can.  And if they are dealing with people who are having problems qualifying they will pump it up to as much as 4 points.

But if you come to me you will get the loan for 1.5 points and I will even show you in advance the rate sheets (Florida state law requires a GFE 72 hours before closing with the total compensation disclosed).

Now in order for us to work this deal you must have a application filled out and on record so we can lock the loan at the 1.5 point price.

At that price I can make a living and you get a great deal and get to work with a professional and licensed mortgage broker who will search out the best rate for your particular circumstances.

If you think you can get a better deal, then good luck!

If you want to move on with more important things in your life, like finding that great home, and know that you are getting a great price for your financing then give me a call!  

Lawsuit attacks developer/lender cartel! February 8, 2008

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Two California home buyers are suing KB Homes and Countrywide Mortgage because they claim the appraisers inflated their home value causing them to overpay for their homes.  I was waiting for this to happen, because for a long time there has been an unholy alliance between developers, lenders, and appraisers.  Here is how it works.  Large developers and large lenders will form a third company (ABA) that allows for the developers to share in the profits from lending.  The developers will encourage folks to use their lender usually by offering incentives.  Friendly appraisers will be lined up that will give maximum value for these new homes.  My experience is that because there are now two companies expecting profits from the loan that the loans are usually loaded with fees and have a above market rate.  The bottom line for customers is that they usually end up giving back those incentives in the terms of the loan.  Ok, so far its legal.  But here is what the lawsuit is about.  After construction is finished an appraisal is required to make sure the value is there for the loan and to determine what the final price will be.  This appraisal is also suppose to protect the buyer from overpaying for the property.  Normally lenders would scrutinize the appraisal to make sure it follows its appraisal guidelines.  But because developers and lenders were in cahoots with each other (in this case KB Homes and Countrywide) the lender did not question the appraisal.  End result is that consumers end up overpaying for their homes and KB and Countrywide end up with large amounts of profits.  In an rapidly increasing market this malfeasance goes unnoticed, but in a stagnant or down market it is a different story.  If this lawsuit is successful I believe it will open up floodgates for other folks. 

Here is the truth.  In real estate deals there should always be independence between the various parties (ie seller, lender, appraiser).

If there isn’t then the temptation for malfeasance is just to high.  If you buy from a developer, always use an independant lender.  Do not…I repeat do not use their lender no matter what they say.  Demand the same concessions they offered to use their lender or walk away.

Option Arm Loans: Good or Bad Loans? February 5, 2008

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West Coast Banks like World Savings, Washington Mutual, Countrywide, and others have originated and propagated option arm mortgages.  In short a option arm is a short term variable rate loan that recalculates the rate frequently based on the “COFI Index.”  This index represents the rate depositors are paid for savings accounts in the 11th District.  Most of these loans are sold with a lower “teaser” rate that is only good for a short period of time.  In addition to the variable nature of the loan, 4 payment options are given.  These usually range from negative amortization payment to a 15 year amortized payment.  Most people that have this loan choose to pay the negative amortization amount.  This means that every time they make a payment their loan amount is increasing.  Popular in California, the underwriters allowed folks to qualify for these loans using the teaser rates.  In short, you could buy a more expensive home using this loan than the other types of loans.

The people selling these loans usually advertised the payment rate and kept the actual interest rate from the consumer as long into the process as they could.  There is a reason for this.  Because these loans are considered higher risk loans, they had a higher underlying interest rate.  This “premium” was anywhere from 1% to 3%.  Now in order to make these loans seem less expensive than they were, and to add to the profit mortgage originators made, almost all option arm’s were sold with a 3 year pre-pay penalty.

One final comment on these loans.  When the loan value went up to 110% of the original value the negative amortization payment rate drops off and your required payment moves to an amortizing payment rate.

Now here is what is happening to folks with these loans.  They have seen their loan amount go up, their real estate value go down, and their payment rate go up.  If they tried to get out of these loans they were hit with the triple whammy.  Pre-payment penalties of 6 months interest, little or no equity left, and debt to income ratio’s that are too high for conforming loan standards.  In short, they are stuck in a very expensive product that has a much higher interest rate than they could have qualified for at the time of their loan.

I have never sold an option arm loan.  I think they are too dangerous for most folks and too expensive to consider.  You make the decision for yourself what you think of these loans.  If you want one there are many folks who will sell you one, just not me.